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Business News/ Market / Stock-market-news/  Emerging nations save $2.9 trillion reserves in rout
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Emerging nations save $2.9 trillion reserves in rout

The 20 most-traded emerging-market currencies have weakened 8% in 2013 as the Fed’s potential paring of stimulus lures away capital

The South African rand, real, rupee, rupiah and lira, dubbed the fragile five by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19%. Photo: AFP (AFP)Premium
The South African rand, real, rupee, rupiah and lira, dubbed the fragile five by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19%. Photo: AFP
(AFP)

Mumbai: Developing nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.

Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6% this year compared with an 11% slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8% in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.

After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.

If fundamentals are going against you, it’s not credible to defend a currency level — investors would rush for the exit when they see the reserves depleting, said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. The central banks are taking the right measures, allowing the currencies to adjust.

‘Fragile five’

The South African rand, real, rupee, rupiah and lira, dubbed the fragile five by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19%.

Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to $2.9 trillion as of 28 August, from $2.95 trillion on 31 December and an all-time high of $2.97 trillion in May, data compiled by Bloomberg show. The holdings increased from $722 billion in 2002.

The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.

In the three months starting September 2008, reserves dropped 11% as Lehman’s collapse sent the real down 29% and the rupee 12%. India’s stockpile declined 16% during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.

‘Contagion potential’

Often, on the day of the intervention or its announcement, a currency will get a small bounce upward, Bluford Putnam, chief economist at CME Group Inc., wrote in an 28 August research report. For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.

Putnam said aggressive short-term interest rate increases that dramatically raise the costs of going short a currency can work to stem an exchange-rate slide.

The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and governor Erdem Basci promised more surprise tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.

Records lows

India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on 28 August. The lira tumbled to an unprecedented 2.0730 the same day.

The rupee plummeted 8.1% in August, the biggest loss since 1992 and the steepest among 78 global currencies, according to data compiled by Bloomberg. The lira plunged 5.1%, the rand dropped 4.1%, the real fell 4.6% and the rupiah sank 5.9%, the data show.

The Indian currency rose 1.1% 66.98 per dollar as of 11:40 am in Mumbai on Wednesday, while its Indonesian counterpart dropped 0.3% to 11,000 versus the greenback.

Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings Plc. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10%, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5%, the data show.

Targeted measures

Policy makers are deploying reserves through targeted measures, according to ING Groep NV. Between January 2009 and June 2013, Brazil, Indonesia and South Africa recorded a net $50 billion of portfolio inflows while Turkey received about $30 billion, the Dutch bank estimates. Foreign-currency stockpiles help protect the countries from a sudden exit of funds, according to Nomura Holdings Inc.

Brazil’s monetary authority announced a $60 billion program on 22 August, using currency swaps and loan facilities to alleviate the dollar shortage in the futures market, where Nomura says most of the trading is done. Turkey’s central bank has sold $8.75 billion at foreign-currency auctions since starting the sales on 11 June. Indonesia extended a bilateral swap deal on 29 August with the Bank of Japan valued at $12 billion that will allow the two nations to borrow from each other’s foreign-exchange reserves.

India’s central bank said on 28 August it will sell dollars to state-run oil importers through swap agreements. Refiners are the largest buyers of foreign-exchange in the nation, which depends on imports for 80% of its oil needs.

‘Hot topic’

Reserve adequacy is a hot topic for the market right now, Chris Turner, the head of currency strategy at ING in London, wrote in an 30 August report. Relative to portfolio inflows, Brazil stands out with 800% coverage by foreign-exchange reserves, while Turkey, Indonesia and South Africa’s reserve coverage looks low by international standards.

Foreign reserves in emerging markets swelled as policy makers bought the greenback to limit appreciation of their currencies and shield exporters as the Fed bought $2.3 trillion of debt from December 2008 to June 2011 and is currently purchasing $85 billion worth of bonds a month.

More declines

Central banks can change tact once exchange rates have adjusted for their nations’ deficits, according to Toronto-based CIBC. The rupee has probably weakened as much as it should, while the rupiah needs to fall further after intervention earlier this year limited the drop, said Patrick Bennett, a strategist at CIBC, said in an 30 August telephone interview from Hong Kong.

Indonesia’s failure to bolster the rupiah after burning through 19% of its holdings this year underscores the limitation of central bank intervention in the $4 trillion foreign-exchange market.

Policy makers are doing the right thing by staying away from intervention as the depreciating currencies are those that are facing current-account or budget deficits, Bennett said. Allowing currency depreciation is like lifting a pressure valve, which allows required adjustment. BLOOMBERG

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Published: 04 Sep 2013, 03:04 PM IST
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